5 Ways Startups Are Upending the Car Business

Numerous new companies are trying to build cars and high-tech auto parts such as EV batteries. These are not those firms. Today we're talking about the small-tech startups trying to change the way we buy, rent, service, and share cars.

Finding a Taxi

Finding a Taxi

You might think the taxi industry would be overjoyed by the arrival of apps that let people hail a car by smartphone. After all, it eliminates inefficiencies on both sides—frustrated passengers trying to flag down a car on the street, and cab drivers cruising around looking for somebody to pick up—that cut into a driver's earnings. But while passengers have flocked to car-hailing apps, the most notorious, Uber, has found itself in a fight in numerous cities where the app has appeared.

Uber works by giving iPhones enabled with the Uber app to drivers, but this removal of the middleman is the source of much consternation. Legally, Uber's position leaves it in a weird gray area. Most of America's cities and states have byzantine rules governing cars for hire; one common provision is that livery cabs (those black cars you hire by calling a car service, which is the kind of car Uber usually uses) aren't supposed to pick up passengers who try to hail them on the street—that's for taxis only. But is Uber acting as a dispatcher? Or is it just a higher-tech way for a potential passenger to raise her arm and hail a cab?

In response to a San Francisco lawsuit, Uber's lawyer said, "Uber complies with all laws and regulations applicable to its business. Any claim to the contrary is baseless and motivated by those who seek to deprive the public of this safe and convenient transportation option. Uber would rather compete for business on the streets of San Francisco than in the courtroom, but Uber will defend these claims in court and is confident of the outcome." Company co-founder Travis Kalanick blamed old-fashioned politics for Uber's legal woes, saying last year, "The older the industry you are tackling the more protected it is by government or by corruption or both."

San Francisco, Chicago, and Washington, D.C. have all filed complaints against the company. New York City did, too, but things are changing. In December, New York reversed course and agreed to allow taxi drivers to connect with passengers-to-be via smartphone apps. UberTaxi just rolled out in D.C. last month; black cars remain the default setting within the app, but users can now hail a taxi.

If nothing else, the notoriety gained by fighting so many major cities has given Uber more publicity than startups like Flywheel, which have tried to play nicer and work with cab companies.

Sharing Cars

Sharing Cars

Cars cost a small fortune to own, refill, insure, and maintain. And most of the time they just sit there; the average car spends 23 hours of the day parked. That's why, in this age of falling car ownership rates, so many startups are keen on car sharing. Why rent a car or call a cab when there are probably dozens of cars in your neighborhood right now that aren't in use? New tech firms such as RelayRides, GetAround, and SideCar have all devised ways for car owners to make a little extra cash by loaning out their cars. RelayRides has even signed a deal with General Motors to set up keyless entry through the OnStar system—so, if I approved you to borrow my car, I wouldn't even need to be there to lend it to you.

It's a brilliantly simple idea that runs into one colossal roadblock: insurance. What if you drive my Jetta into a telephone pole? ZipCar, now the old man of car-sharing startups (and recently purchased by Avis Budget Group), provides insurance as part of the deal. But it also owns its fleet of cars—the company doesn't have to deal with inconveniencing me if it lends you my car and you destroy it. RelayRides does. Yet it's a two-way street: RelayRides doesn't own any cars, which leaves more cash to deal with the insurance question (the company's founder says he found an insurance company that would back the program).

But car-sharing apps can't avoid the legal snares that plague taxi-sharing apps. The California-based startup Lyft is another variation on the theme, in which anyone over 23 with a car in good condition can sign up to be a driver, and then pick up passengers who request a lift through the Lyft app. Co-founder John Zimmer told LA Weekly that Lyft isn't a taxi service because all the trips are prearranged and passengers can't just hail a car on the street, therefore the company shouldn't be bound by rules that govern taxis, including those that demand drivers get a special license.

Nevertheless, the California Public Utilities Commission (which regulates the taxis) filed a cease-and-desist order. Lyft settled with the commission in January, avoiding a fine by agreeing to a new set of rules. Yet Lyft, SideCar, and other startups remain in legal limbo. The whole idea of these companies is to take advantage of the fact that so many cars sit unused; if the rules say a car-sharing company must own its cars, then their business model is shot.